From sharp increases in the price of the household weekly shop to rising costs for businesses, high inflation and high interest rates touch all our lives, writes Muniya Barua, Deputy Chief Executive at BusinessLDN.
Getting inflation under control is a prerequisite for economic success. With that in mind, the Bank of England announced its 13th consecutive rate rise to 5%. While this will benefit firms and savers with cash in the bank, indebted businesses and households, particularly those in London, will be hard hit.
Data from the Institute for Fiscal Studies shows that because of rising interest rises, the disposable income of households with mortgages could fall by around 6-7% in the North of England and Midlands, but by as much as 12% in London. Given housing costs account for a greater share of income in the capital than elsewhere, households will become more cash strapped and businesses must brace themselves for increasing economic headwinds.
So, what’s to be done about it?
First, firms should do what they can to support workers already facing the worst of the squeeze. We know many employers in the City and beyond are already helping. A recent survey published by, BusinessLDN, of more than 1,000 employees found that two-thirds of London’s businesses are offering extra support to staff, outside of pay. This includes flexible working, travel or supermarket vouchers or subsidised food as an additional benefit. However, One in five of London’s workforce – some 700,000 people – are still paid less than that rate and it is people at the bottom of the ladder who are being hurt the most by inflation and high interest rates. So we would urge firms that can afford to do so to pay staff the London Living Wage.
Second, no stone should be left unturned in the quest to boost productivity. The Centre for Cities recently calculated that, since the financial crisis, London’s productivity growth has been just 0.2% per annum, below the national average and about 5% of the level it was running at in the decade before. Despite the number of people in work across the UK rising to a record high in March, businesses in London are still struggling to fill vacancies and match them with the skills they need, therefore limiting their output. We are leading the Greater London Local Skills Improvement Plan, which will shortly set out a blueprint for tackling skills challenges by better matching training provision with demand. Investing in digital technology and skills is a key part of the solution, as not only will it help firms’ future proof themselves and improve efficiency, ultimately, it will get more Londoners into jobs too. The creation of a new one-stop shop London Careers service for all ages and reform of the Apprenticeship Levy would also help to boost up-take and enable greater flexibility for businesses and individuals.
And third, with domestic consumption being hit, the Government should look for to boost growth. Restoring VAT-free shopping for international visitors would be a sensible start. The benefits would outweigh the costs, generating £4.1 billion gross added value annually and creating 78,000 jobs according to a study by Oxford Economics. The Government should get the Office for Budget Responsibility to crunch the numbers to confirm.
With interest rates now at the highest they have been in 15 years and further hikes likely, it’s vital the Government pulls out the stops to get the economy moving again. Businesses in the City and across London are already playing their part.